We hope that you enjoyed your long weekend.

As May draws to a close it has been a significant month for a number of reasons, but most notably the call for a general election in July.

ELECTION IMPACT AND MARKET DYNAMICS

After 14 years under five Conservative prime ministers, Brexit, Boris Johnson’s chaotic Covid-era leadership, and Liz Truss’s brief 49-day tenure, polls indicate Labour’s Keir Starmer will likely replace Rishi Sunak as the UK premier.

Observers expect a Labour victory, meaning Sunak will lead the UK at the G7 summit in Italy next month, but Starmer could represent Britain at the NATO summit in Washington five days after the July 4 election.

This is an unexpected election gamble by Sunak, who will attempt to avoid a landslide defeat by urging voters to “stick to the plan”, which he claims is driving an economic recovery. He’ll promise more tax cuts and draw a clear line with Labour on migration by pledging to send asylum seekers to Rwanda. Despite 18 months in office, Sunak has not improved Tory polling and privately admits that winning would be “the greatest comeback in political history”. The real question on July 4 may be not whether Labour wins, but by how much.

Starmer’s message to voters, investors, and world leaders emphasizes “change” followed by “stability” after years of political and economic turmoil. Labour plans to preach caution on public spending, strengthen national security, and seek closer ties with Europe, even aiming to engage with Donald Trump. The current campaign may not be as volatile as previous ones if the polls hold steady. Unlike 2019, when Jeremy Corbyn’s radical manifesto unsettled voters, or the Brexit and Scottish referendums, no side is seen as particularly unfriendly to investors. A Bloomberg survey last year suggested a Labour-led government could be favourable for stocks and the pound. However, this could shift if either party introduces game-changing policies.

With polls heavily favouring Labour, there is little jeopardy in the race for now. The risk lies in the possibility of the contest narrowing during the campaign, raising the chances of a hung parliament and associated uncertainty. There may be the potential for a “deeper relationship” with the EU under Labour, impacting the pound, but we expect caution in fiscal pledges to avoid spooking bond markets as happened immediately after the Truss-Kwarteng “Mini Budget”.

Historically UK stocks typically see modest gains after elections, especially following Labour victories, with the FTSE 250 likely benefiting more than the FTSE 100. There are a number of possible scenarios: a large Labour majority, a narrow Labour majority prompting more interventionist policies, a hung parliament, or a Conservative win, each impacting markets differently.

We consider that there is a low likelihood of radical policy shifts this time, contributing to a calm market reaction. We believe the election will generate “noise” rather than significant direction for the pound, with inflation and Bank of England policies remaining more critical for gilt markets. Financial markets and international businesses appear relatively relaxed about a potential Labour government, viewing it as moderate and centrist, especially after recent Conservative economic missteps. The Shadow chancellor Rachel Reeves has been courting influential opinions in the financial sector and those that would previously have been wary of a Labour government have welcomed the more proactive and collaborative approach.

MARKET UPDATE

Major developed economies continue to gain growth momentum. The G4 economies — the US, Eurozone, Japan, and the UK—are witnessing the fastest combined growth in manufacturing and services in a year. This upswing is spearheaded by the US, recovering from an April dip, with the Eurozone and Japan accelerating further, and the UK maintaining robust growth.

INFLATION DYNAMICS AND POLICY IMPLICATIONS

Inflation remains elevated across all G4 economies, with the UK and Japan experiencing higher rates than the US and Eurozone. While service sector inflation is trending lower, reducing wage-related price pressures, manufacturing is seeing renewed price pressures, except in the Eurozone.

UPCOMING DATA AND MARKET VOLATILITY

Key data releases are imminent, notably the US personal consumption expenditures (PCE) price index. Economists expect this index to show the smallest increase this year, which could ease concerns for Fed policymakers. However, rising output prices amid economic recovery add uncertainty to the Fed’s path, suggesting continued market volatility.

REGIONAL DIFFERENCES AND EXPECTATIONS

In the Eurozone, easing inflationary pressures in May could be reflected in the upcoming CPI data, potentially paving the way for ECB rate cuts in June.

The interplay of reviving growth and persistent inflation suggests cautiousness among US and European policymakers in loosening monetary policy. They are likely to observe the impact of stronger growth on pricing power and wage negotiations before making significant changes.

STRATEGIC OUTLOOK AND POSITIONING

We maintain a cautiously optimistic view on global equities. However, we remain acutely aware of conflicting economic data, inconsistent market reactions, and ongoing geopolitical risks. Our strategy focuses on risk mitigation while seeking long-term growth, ensuring portfolios are managed carefully to leverage current market opportunities.

CONCLUSION

In conclusion, while the road ahead may be fraught with uncertainties, opportunities will present themselves for astute investors willing to embrace the volatility.

As stewards of your capital, we are committed to navigating these turbulent waters with prudence and foresight, ensuring the preservation and growth of your wealth over the long term. We will be making some changes to the portfolios over the coming weeks to better align them to the changing environment.

Thank you for your continued trust and confidence.
Warm regards,